UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q





x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the quarterly period ended September 30, 2009.


or




 ̈
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the transition period from 
to




Commission File Number 000-19709







BIOLARGO,
INC.


(Exact name of
registrant as specified in its charter)





Delaware
              
              65-0159115(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)




2603
Main Street, Suite 1155


Irvine,
California 92614


(Address,
including zip code, of principal executive offices)




(949) 643-9540


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Exchange Act: None


Securities
registered pursuant to Section 12(g) of the Exchange Act: Common Stock,
$0.0067 par


value.







Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
accelerated filer      ̈ Accelerated
filer                   
 ̈                    
   Non-accelerated
filer        ̈              
      Smaller reporting company  x






Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x




The
number of shares of the Registrant’s Common Stock outstanding as of September
30, 2009 was 42,897,751 shares.










Table of
Contents




BIOLARGO, INC.


FORM
10-Q


INDEX




PagePART IItem 1
                                                        Financial
      Statements
                                                        1Item 2
                                                        Management's
      Discussion and Analysis
                                                        17Item 4
                                                        Controls
      and Procedures
                                                        23PART IIItem 2
                                                        Unregistered
      Sales of Equity Securities and Use of
    Proceeds
                                                        24Item 4
                                                        Submission
      of Matters to a Vote of Security Holders
                                                        24Item 6
                                                        Exhibits
                                                        24Signatures
                                                        25Exhibit
      IndexExhibit31.1
                                                          Exhibit
      31.2
                                                          Exhibit
      32





i







PART
I


Item 1. Financial
Statements


BIOLARGO, INC. AND
SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


AS OF DECEMBER 31, 2008 AND SEPTEMBER
30, 2009




December
      31,
                                                                      
                                                                      
                                                                      September
      30,2008
                                                                      
                                                                      
                                                                      2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                                                                      
                                                                      $
                                                                      90,384
                                                                      
                                                                      
                                                                      $
                                                                      138,692Accounts
      receivable
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      11,223Inventory
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      4,843Prepaid
      assets
                                                                      
                                                                      
                                                                      4,586
                                                                      
                                                                      
                                                                      
                                                                      4,586Total
      current assets
                                                                      
                                                                      
                                                                      94,970
                                                                      
                                                                      
                                                                      
                                                                      159,344FIXED
      ASSETSEquipment,
      net
                                                                      
                                                                      
                                                                      25,954
                                                                      
                                                                      
                                                                      
                                                                      18,781Total
      fixed assets
                                                                      
                                                                      
                                                                      25,954
                                                                      
                                                                      
                                                                      
                                                                      18,781OTHER
      ASSETSLicensing
      rights, net
                                                                      
                                                                      
                                                                      9,633,052
                                                                      
                                                                      
                                                                      
                                                                      8,866,468Assigned
      agreements, net
                                                                      
                                                                      
                                                                      255,285
                                                                      
                                                                      
                                                                      
                                                                      191,466TOTAL
      ASSETS
                                                                      
                                                                      $
                                                                      10,009,261
                                                                      
                                                                      
                                                                      $
                                                                      9,236,059LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                                                                      
                                                                      $
                                                                      993,431
                                                                      
                                                                      
                                                                      $
                                                                      1,201,434Accrued
      option compensation expense
                                                                      
                                                                      
                                                                      657,801
                                                                      
                                                                      
                                                                      
                                                                      1,004,208Convertible
      notes payable, current portion
                                                                      
                                                                      
                                                                      1,000,000
                                                                      
                                                                      
                                                                      
                                                                      1,913,625Discount
      on convertible notes, current portion net of amortization
                                                                      
                                                                      
                                                                      (568,738
                                                                      )
                                                                      
                                                                      
                                                                      (608,050
                                                                      )Note
      payable
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      70,000Total
      Current Liabilities
                                                                      
                                                                      
                                                                      2,082,494
                                                                      
                                                                      
                                                                      
                                                                      3,581,217LONG-TERM
      LIABILITIESConvertible
      notes payable, net of current portion
                                                                      
                                                                      
                                                                      973,625
                                                                      
                                                                      
                                                                      
                                                                      954,360Discount
      on convertible notes, net of current portion and
    amortization
                                                                      
                                                                      
                                                                      (400,950
                                                                      )
                                                                      
                                                                      
                                                                      (447,951
                                                                      )Total
      Long-term Liabilities
                                                                      
                                                                      
                                                                      572,675
                                                                      
                                                                      
                                                                      
                                                                      506,409TOTAL
      LIABILITIES
                                                                      
                                                                      
                                                                      2,655,169
                                                                      
                                                                      
                                                                      
                                                                      4,087,626COMMITMENTS,
      CONTINGENCIES AND SUBSEQUENT EVENTSSTOCKHOLDERS’
      EQUITYConvertible
      Preferred Series A, $.00067 par value, 50,000,000
    sharesauthorized,
      -0- shares issued and outstanding, at September 30, 2009and
      December 31, 2008.
                                                                      
                                                                      
                                                                      —
                                                                      
                                                                      
                                                                      
                                                                      —Common
      Stock, $.00067 par value, 200,000,000 shares authorized,42,897,751
      and 42,261,268 shares issued, at September 30, 2009 andDecember 31,
      2008, respectively.
                                                                      
                                                                      
                                                                      28,319
                                                                      
                                                                      
                                                                      
                                                                      28,763Additional
      Paid-In Capital
                                                                      
                                                                      
                                                                      49,481,805
                                                                      
                                                                      
                                                                      
                                                                      52,597,017Accumulated
      Deficit
                                                                      
                                                                      
                                                                      (42,156,032
                                                                      )
                                                                      
                                                                      
                                                                      (47,459,347
                                                                      )Total
      Stockholders’ Equity
                                                                      
                                                                      
                                                                      7,354,092
                                                                      
                                                                      
                                                                      
                                                                      5,148,433TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                                      
                                                                      $
                                                                      10,009,261
                                                                      
                                                                      
                                                                      $
                                                                      9,236,059




See
accompanying notes to consolidate financial statements




1




BIOLARGO,
INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE


THREE-AND
NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2008 AND 2009


(unaudited)




For
      the three-month periods
                                        ended
      September 30,
                                      
                                      
                                      For
      the nine-month periods
                                        ended
      September 30,2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009(unaudited)
                                      
                                      
                                      (unaudited)
                                      
                                      
                                      (unaudited)
                                      
                                      
                                      (unaudited)Revenue
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      115,741
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      115,741Total
      revenue
                                      
                                      
                                      —
                                      
                                      
                                      
                                      115,741
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      115,741Cost
      of goods sold
                                      
                                      
                                      
                                      
                                      
                                      
                                      72,175
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      72,175Total
      cost of goods sold
                                      
                                      
                                      —
                                      
                                      
                                      
                                      72,175
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      72,175Costs
      and expensesSelling,
      general and administrative
                                      
                                      
                                      915,101
                                      
                                      
                                      
                                      919,103
                                      
                                      
                                      
                                      3,865,758
                                      
                                      
                                      
                                      3,056,771Research
      and development
                                      
                                      
                                      54,456
                                      
                                      
                                      
                                      39,319
                                      
                                      
                                      
                                      148,140
                                      
                                      
                                      
                                      132,637Amortization
      and depreciation
                                      
                                      
                                      278,169
                                      
                                      
                                      
                                      279,192
                                      
                                      
                                      
                                      831,771
                                      
                                      
                                      
                                      837,576Total
      costs and expenses
                                      
                                      
                                      1,247,726
                                      
                                      
                                      
                                      1,237,614
                                      
                                      
                                      
                                      4,845,669
                                      
                                      
                                      
                                      4,026,984Loss
      from operations
                                      
                                      
                                      (1,247,726
                                      )
                                      
                                      
                                      (1,194,048
                                      )
                                      
                                      
                                      (4,845,669
                                      )
                                      
                                      
                                      (3,983,418
                                      )Other
      income and (expense)Interest
      expense
                                      
                                      
                                      (300,912
                                      )
                                      
                                      
                                      (454,429
                                      )
                                      
                                      
                                      (794,123
                                      )
                                      
                                      
                                      (1,329,235
                                      )Other
      income
                                      
                                      
                                      2,684
                                      
                                      
                                      
                                      7,774
                                      
                                      
                                      
                                      17,296
                                      
                                      
                                      
                                      9,338Net
      other income and (expense)
                                      
                                      
                                      (298,228
                                      )
                                      
                                      
                                      (446,655
                                      )
                                      
                                      
                                      (776,827
                                      )
                                      
                                      
                                      (1,319,897
                                      )Net
      loss
                                      
                                      $
                                      (1,545,954
                                      )
                                      
                                      $
                                      (1,640,703
                                      )
                                      
                                      $
                                      (5,622,496
                                      )
                                      
                                      $
                                      (5,303,315
                                      )Loss
      per common share – basic and dilutedLoss
      per share
                                      
                                      $
                                      (0.04
                                      )
                                      
                                      $
                                      (0.04
                                      )
                                      
                                      $
                                      (0.13
                                      )
                                      
                                      $
                                      (0.12
                                      )Weighted
      average common share equivalents outstanding
                                      
                                      
                                      41,897,944
                                      
                                      
                                      
                                      42,920,614
                                      
                                      
                                      
                                      42,325,788
                                      
                                      
                                      
                                      42,535,996




See
accompanying notes to consolidated financial statements




2


BIOLARGO,
INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2009




Common
      StockNumber
                                                                          
                                                                          
                                                                          Par
                                                                          
                                                                          
                                                                          Additional
                                                                          
                                                                          
                                                                          Retainedof
                                                                          
                                                                          
                                                                          Value
                                                                          
                                                                          
                                                                          Paid-In
                                                                          
                                                                          
                                                                          EarningsShares
                                                                          
                                                                          
                                                                          $.00067
                                                                          
                                                                          
                                                                          Capital
                                                                          
                                                                          
                                                                          (Deficit)
                                                                          
                                                                          
                                                                          TotalBALANCE
      DECEMBER 31, 2008
                                                                          
                                                                          
                                                                          42,261,268
                                                                          
                                                                          
                                                                          $
                                                                          28,319
                                                                          
                                                                          
                                                                          $
                                                                          49,481,805
                                                                          
                                                                          
                                                                          $
                                                                          (42,156,032
                                                                          )
                                                                          
                                                                          $
                                                                          7,354,092Vested
      portion of stock option
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          953,799
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          953,799Issuance
      of warrants as part of convertible note offering
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          838,398
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          838,398Issuance
      of stock option to related party (New Millennium)
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          248,485
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          248,485Issuance
      of stock options to officer and board of directorin
      lieu of services
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          256,838
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          256,838Issuance
      of stock for services
                                                                          
                                                                          
                                                                          420,360
                                                                          
                                                                          
                                                                          
                                                                          287
                                                                          
                                                                          
                                                                          
                                                                          188,269
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          188,556Issuance
      of stock options for services
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          94,131
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          94,131Conversion
      of note payable accrued interest obligation
                                                                          
                                                                          
                                                                          216,123
                                                                          
                                                                          
                                                                          
                                                                          157
                                                                          
                                                                          
                                                                          
                                                                          93,557
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          93,714Fair
      value of warrant re-pricing
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          423,735
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          423,735Net
      loss for the nine-month period ended September 30, 2009
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          (5,303,315
                                                                          )
                                                                          
                                                                          
                                                                          (5,303,315
                                                                          )42,897,751
                                                                          
                                                                          
                                                                          $
                                                                          28,763
                                                                          
                                                                          
                                                                          $
                                                                          52,597,017
                                                                          
                                                                          
                                                                          $
                                                                          (47,459,347
                                                                          )
                                                                          
                                                                          $
                                                                          5,148,433




See
accompanying notes to consolidated financial statements




3





BIOLARGO,
INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2008 AND 2009






For
      the nine-month periodsEnded
      September 30,2008
                                                                                  
                                                                                  
                                                                                  2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Loss
                                                                                  
                                                                                  $
                                                                                  (5,622,496
                                                                                  )
                                                                                  
                                                                                  $
                                                                                  (5,303,315
                                                                                  )Adjustments
      to Reconcile Net Loss to Net Cash Used in Operating
      Activities:Non-cash
      interest expense  related to conversion of note holder
      obligations
                                                                                  
                                                                                  
                                                                                  75,362
                                                                                  
                                                                                  
                                                                                  
                                                                                  35,692Non-cash
      interest expense related to the fair value of warrants issued in
      conjunction with our convertible notes
                                                                                  
                                                                                  
                                                                                  553,493
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,101,365Non-cash
      expense related to options issued to officers and board of
      directors
                                                                                  
                                                                                  
                                                                                  998,506
                                                                                  
                                                                                  
                                                                                  
                                                                                  950,707Non-cash
      expense related to warrants and options issued to
    consultants
                                                                                  
                                                                                  
                                                                                  1,348,335
                                                                                  
                                                                                  
                                                                                  
                                                                                  498,000Issuance
      of stock for services provided
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  309,414Amortization
      and depreciation expense
                                                                                  
                                                                                  
                                                                                  831,771
                                                                                  
                                                                                  
                                                                                  
                                                                                  837,576Increase
      in inventory
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  (4,843
                                                                                  )Increase
      in accounts receivable
                                                                                  
                                                                                  
                                                                                  —
                                                                                  
                                                                                  
                                                                                  
                                                                                  (11,223
                                                                                  )Increase
      in accounts payable and accrued expenses
                                                                                  
                                                                                  
                                                                                  240,130
                                                                                  
                                                                                  
                                                                                  
                                                                                  695,435Net
      Cash Used In Operating Activities
                                                                                  
                                                                                  
                                                                                  (1,574,899
                                                                                  )
                                                                                  
                                                                                  
                                                                                  (891,102
                                                                                  )CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of fixed assets
                                                                                  
                                                                                  
                                                                                  (16,414
                                                                                  )
                                                                                  
                                                                                  
                                                                                  —Net
      Cash Used in Investing Activities
                                                                                  
                                                                                  
                                                                                  (16,414
                                                                                  )
                                                                                  
                                                                                  
                                                                                  —CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from exercised warrants
                                                                                  
                                                                                  
                                                                                  608,750
                                                                                  
                                                                                  
                                                                                  
                                                                                  —Payments
      to note payable
                                                                                  
                                                                                  
                                                                                  (22,076
                                                                                  )
                                                                                  
                                                                                  
                                                                                  —Proceeds
      from note payable
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  70,000Proceeds
      from convertible notes
                                                                                  
                                                                                  
                                                                                  913,625
                                                                                  
                                                                                  
                                                                                  
                                                                                  869,410Net
      Cash Provided By Financing Activities
                                                                                  
                                                                                  
                                                                                  1,500,299
                                                                                  
                                                                                  
                                                                                  
                                                                                  939,410NET
      CASH (USED IN) PROVIDED BY  IN CASH AND CASH
      EQUIVALENTS
                                                                                  
                                                                                  
                                                                                  (91,014)
                                                                                  
                                                                                  
                                                                                  
                                                                                  48,308CASH
      AND CASH EQUIVALENTS — BEGINNING
                                                                                  
                                                                                  
                                                                                  457,809
                                                                                  
                                                                                  
                                                                                  
                                                                                  90,384CASH
      AND CASH EQUIVALENTS — ENDING
                                                                                  
                                                                                  $
                                                                                  366,795
                                                                                  
                                                                                  
                                                                                  $
                                                                                  138,692SUPPLEMENTAL
      DISCLOSURES OF CASHFLOW INFORMATIONCash
      Paid During the Period for:Interest
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  —Income
      taxes
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  —Conversion
      of interest related to our convertible notes
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  91,363Conversion
      of convertible notes to shares of the Company’s common
    stock
                                                                                  
                                                                                  $
                                                                                  1,173,009
                                                                                  
                                                                                  
                                                                                  $
                                                                                  —Conversion
      of accrued expenses to shares of the Company’s common
    stock:Board
      of Directors and officer obligations
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  150,000Consultant
      obligations
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  75,678Conversion
      of related party – New Millennium and other
                                                                                  
                                                                                  $
                                                                                  —
                                                                                  
                                                                                  
                                                                                  $
                                                                                  242,358SUPPLEMENTAL
      DISCLOSURES OF NON-CASH FINANCING AND INVESTING
ACTIVITIES:Issuance
      of warrants in conjunction with convertible note offerings
                                                                                  
                                                                                  $
                                                                                  736,237
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1,240,178Re-priced
      warrants in conjunction with convertible note offering
                                                                                  
                                                                                  $
                                                                                  76,300
                                                                                  
                                                                                  
                                                                                  $
                                                                                  52,967




See
accompanying notes to consolidated financial statements




4


BIOLARGO,
INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Note
1. Business and Organization




Outlook




Prior to
the acquisition of certain patented and patent-pending intellectual property and
other assets (the “BioLargo technology”) from IOWC Technologies, Inc. (“IOWC”)
on April 30, 2007, BioLargo, Inc. (the “Company”, or “we”) had no
continuing business operations and operated as a shell company.





We will
be required to raise substantial capital to sustain our expanded operations,
including without limitation, hiring additional personnel, additional scientific
and third-party testing, costs associated with obtaining regulatory approvals
and filing additional patent applications to protect our intellectual property,
and possible strategic acquisitions or alliances, as well as to meet our
liabilities as they become due for the next 12 months.





We will
need additional outside capital until and unless our technology or products are
able to generate positive working capital sufficient to fund our cash flow
requirements from operations, and we may be compelled to reduce or curtail
certain activities to preserve cash.





These
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of our business. As reflected in the
accompanying financial statements, for the nine-month period ended September 30,
2009, we had a net loss of $5,303,315 and negative cash flow from operating
activities of $891,102. As of September 30, 2009, we had negative working
capital of $3,421,873, and an accumulated stockholders’ deficit of $47,459,347.
Also, as of September 30, 2009, we had limited liquid and capital resources. The
foregoing factors raise substantial doubt about our ability to continue as a
going concern. Ultimately, our ability to continue as a going concern is
dependent upon our ability to attract new sources of capital and exploit our
technology so that it attains a reasonable threshold of operating efficiencies
and achieves profitable operations. The financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.





As of
September 30, 2009, cash and cash equivalents totaled
$138,692.  During the nine-month period ended September 30, 2009 we
received proceeds of
$894,360 and issued convertible promissory notes pursuant to our outstanding
private securities offerings. (See Note 4.) Also, during the three month period
ended September 30, 2009, we received proceeds of $70,000 related to a note
payable. (See Note 6.)





As of
September 30, 2009, we had $2,937,985 aggregate principal amount, together with
$273,138 accrued and unpaid interest, outstanding on promissory notes and a note
payable that mature at various times during 2010, 2011 and 2012. (See Note 4 and
Note 6.)




In the
opinion of management, the accompanying balance sheets and related statements of
operations, cash flows, and stockholders’ equity include all adjustments,
consisting only of normal recurring items, necessary for their fair presentation
in conformity with accounting principles generally accepted in the United States
of America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, and expenses. Actual results and outcomes may differ from management’s
estimates and assumptions. Estimates are used when accounting for stock-based
transactions, account payables and accrued expenses and taxes, among others.




Quarterly
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
Management’s Discussion and Analysis and financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2008.




Organization




We were
initially organized under the laws of the State of Florida in 1989 as
Repossession Auction, Inc. In 1991, we merged into a Delaware corporation
bearing the same name. In 1994, we changed our name to Latin American Casinos,
Inc. to reflect our new focus on the gaming and casino business in South and
Central America, and in 2001 we changed our name to NuWay Energy, Inc. to
reflect our new emphasis on the oil and gas development industry. During
October 2002, we changed our name to NuWay Medical, Inc. coincident with
the divestiture of our non-medical assets and the retention of new management.
In March 2007, in connection with the approval by our stockholders of the
acquisition of the BioLargo technology, we changed our name to BioLargo,
Inc.




5


BIOLARGO,
INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Business
Overview




By
leveraging our suite of patented and patent-pending intellectual property, which
we refer to as the BioLargo technology, our business strategy is to harness and
deliver nature’s best disinfectant — iodine — in a safe, efficient,
environmentally sensitive and cost-effective manner. The centerpiece of our
BioLargo technology is CupriDyneTM, which works by combining minerals with water
from any source and delivering “free iodine” on demand, in controlled dosages,
in order to balance efficacy of disinfectant performance with concerns about
toxicity.





In
addition to our BioLargo technology, in 2008 we acquired the rights to market an
iodine based water disinfection system (the “Isan system”) from Ioteq IP Pty.
Ltd., an Australian company, and its U.S. affiliate Ioteq Inc. The Isan system
is an automated water disinfection system that substantially reduces the
incidence of fungal growth, spoilage, organisms and pathogens in water and on
food. Capable of treating high volumes of water flow, the Isan system is a
combination of electrodes for measuring iodine levels in the target water
stream, a control unit which automatically controls the running of the system,
iodine canisters to deliver the iodine, and resin canisters to collect
by-products after disinfection has been completed. The Isan system is registered
with the APVMA (Australian Pesticides and Veterinary Medicines Authority) and
FSANZ (Food Standards Australia and New Zealand) in Australia and New Zealand,
where it has approximately 150 customer installations currently
operating.




Both our
BioLargo technology and the Isan system have potential commercial applications
within global industries, including but not limited to agriculture, animal
health, beach and soil environmental remediation, consumer products, food
processing, medical, and water industries. While we believe the potential
applications are many, we are currently focused in two primary areas — the
agriculture and animal health industries.





First, we
are focused on commercializing our BioLargo technology and the Isan system in
products applicable to the agriculture industry. We are actively seeking to
secure strategic partners to either license or partner with to exploit
commercial opportunities for CupriDyne and for the Isan system. The Isan related
opportunities are focused primarily on post-harvest treatment of fruits and
vegetables, irrigation supply, and hydroponic growers. We continue to work with
a number of very large global companies who are engaged in technology evaluation
and testing processes. Simultaneously, we are also actively seeking to identify
and negotiate regional or global partnerships to exploit commercial
opportunities for these technologies. No such regional or global partnerships
have been formed at this time, and we can make no representation about our
ability to successfully conclude such partnership arrangements.





Second,
in 2009 we introduced animal health products under the brand name
“Odor-No-More”, and continue development of additional products.





Although
we are focused primarily on the agriculture and animal health industries, we
also intend to continue to advance our intellectual property, product designs
and licensing opportunities for our technology for use in other industries, as
capital resources are available to support these efforts.




Odor-No-MoreÔ




During
2008 we identified and began development of three products incorporating our
BioLargo technology targeted to the animal health marketplace, the primary
product advantages help customers save time and money while controlling odor and
moisture. In 2009, we have begun
selling these products under the “Odor-No-More” brand name:




1.
            Animal
      Bedding Additive (for
      horses/livestock, small animals, reptiles, and
    birds)


2.
            Cat
      Litter Additive


3.
            Facilities
      and Equipment Wash





6




BIOLARGO,
INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


We have
established local third party manufacturing and packaging for the products, as
well as alternative manufacturing facilities in other parts of the United
States. On May 13, 2009, as a result of our test marketing efforts, we
announced the launch of our initial three Odor-No-More branded products. Since
that time, we have signed national distributors in the animal care market, one
of the largest catalog and eCommerce animal health supply retailers, a
distributor in the exotic animal care market, and are currently in discussions
with other industry leaders. We received our first large commercial order for
Odor-No-More products, from national distributor E.T. Horn Company, in June
2009, and as of the quarterly period ended September 30, 2009, earned
revenue.




As part
of our promotional and advertising campaign we are sponsoring and participating
in equestrian events, local fairs, trade shows, horse and livestock shows, and a
horse rescue organization.




In
September 2009, we launched three new bedding additive products for small
animals, birds and reptiles. We plan to market these products to the pet
industry in the near future.




Note
2. Odor-No-More




Inventory




Inventories
consist of raw materials and finished goods related to our Odor-No-More products
and are valued at the lower of cost or market. As of September 30, 2009 we had
$4,843 of inventory.




Note
3. Intangible Assets/Long-lived Assets




Licensing
rights are stated on the balance sheet net of accumulated amortization of
$8,866,468 as of September 30, 2009. Amortization expense for the nine-month
periods ended September 30, 2008 and 2009 was $766,584. At September 30, 2009
the weighted average remaining amortization period for the licensing rights was
approximately 10 years.





Certain
agreements assigned to us in connection with our acquisition of the BioLargo
technology (the “Assigned Agreements”) are stated on the balance sheet net of
accumulated amortization of $191,466 at September 30, 2009. Amortization
expense for the nine-month periods ended September 30, 2008 and 2009 was
$63,819. At September 30, 2009 the weighted average remaining amortization
period was approximately 2 years.




Note
4. Sale of Unregistered Securities




Spring 2009
Offering




In
April 2009 we commenced a private offering (the “Spring 2009 Offering”) of
up to $1,000,000 of our 10% convertible promissory notes due June 1, 2012 (the
“Spring 2009 Notes”), subject to an over-allotment option of 15%, or an
aggregate $1,150,000 principal amount of Spring 2009 Notes.  We can
unilaterally convert the Spring 2009 Notes (i) on or after December 15,
2009, if we have received one or more written firm commitments, or have closed
on one or more transactions, or a combination of the foregoing, of at least
$3 million gross proceeds of equity or debt; or (ii) on the maturity
date. Accordingly, the Spring 2009 Notes may be repaid in cash or may be
converted, at the noteholders’ option or our option, into shares of our common
stock, on or before the maturity date.





The
Spring 2009 Notes are convertible into shares of our common stock at a
conversion price of $0.55 per share.  Purchasers of the Spring 2009
Notes receive, for no additional consideration, two stock purchase warrants,
each of which entitle the holder to purchase the number of shares of the
Company’s Common Stock into which the principal amount of the Note is initially
convertible. The first warrant (the “Spring 2009 One-Year Warrant”) is
exercisable at a price of $0.75 per share and expires on June 1, 2010. The
second warrant (the “Spring 2009 Three-Year Warrant”) is exercisable at a price
of $1.00 per share and expires on June 1, 2012. (See Note 8.)





From the
inception of the Spring 2009 Offering in April 2009, through September 30, 2009
we received gross and net proceeds of $231,360 from nine investors and issued
Spring 2009 Notes, the principal amount of which allow for conversion into an
aggregate 420,657 shares of our common stock. (See also Note 14.)




7




BIOLARGO,
INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Fall 2008
Offering




In
October 2008 we commenced a private offering (the “Fall 2008 Offering”) of
up to $1,000,000 of our 10% convertible promissory notes due October 15,
2011 (the “Fall 2008 Notes”), subject to an over-allotment option of 15%, or an
aggregate $1,150,000 principal amount of Fall 2008 Notes, which offering
terminated on March 31, 2009. We can unilaterally convert the Fall 2008
Notes (i) on or after April 30, 2009, if we have received one or more
written firm commitments, or have closed on one or more transactions, or a
combination of the foregoing, of at least $3 million gross proceeds of
equity or debt; or (ii) on the maturity date. Accordingly, the Fall 2008
Notes may be repaid in cash or may be converted, at the noteholders’ option or
our option, into shares of our common stock, on or before the October 15,
2011 maturity date.





As
originally offered, the Fall 2008 Notes were convertible into shares of our
common stock at an initial conversion price of $1.00 per share. Also as
originally offered, purchasers of the Fall 2008 Notes were to receive, for no
additional consideration, two stock purchase warrants, each of which entitled
the holder to purchase the number of shares of the Company’s Common Stock into
which the principal amount of the Note was convertible. The first warrant (the
“Fall 2008 One-Year Warrant”) was exercisable at an initial price of $1.00 per
share and was due to expire on October 15, 2009. The second warrant (the “Fall
2008 Three-Year Warrant” and together with the One-Year Warrant, the “Fall 2008
Warrants”) was exercisable at an initial price of $2.00 per share and was due to
expire on October 15, 2011. (See Note 8.)





On
January 16, 2009, our Board of Directors amended the terms of the Fall 2008
Offering as follows: (i) the initial conversion price of the Fall 2008
Notes was reduced from $1.00 per share to $0.50 per share; (ii) the
exercise price of the Fall 2008 One-Year Warrant was reduced from $1.00 per
share to $0.75 per share; (iii) the exercise price of the Fall 2008
Three-Year Warrant was reduced from $2.00 per share to $1.00 per share; and the
number of shares of our Common Stock for which the Fall 2008 One-Year Warrants
and the Fall 2008 Three-Year Warrants may be exercised is being increased from
one share per dollar invested to two shares for each dollar
invested.





We
received gross and net proceeds of $723,000 from eighteen investors and issued
Fall 2008 Notes, the principal amount of which allow for conversion into an
aggregate 1,446,000 shares of our common stock. Of this amount, $60,000 was
received during 2008, $400,000 during the three-month period ended March 31,
2009, and $263,000 during the three-month period ended June 30,
2009.




Spring 2008
Offering




Pursuant
to a private offering that commenced March 2008 (the “Spring 2008
Offering”) and terminated August 2008, we sold $913,625 of our 10%
convertible notes (the “Spring 2008 Notes”), which are due and payable on
March 31, 2010, to 30 investors, convertible into an aggregate 676,775
shares of our common stock. The Spring 2008 Notes are convertible into shares of
our common stock at an initial conversion price of $1.35 per share. The Spring
2008 Notes can be converted voluntarily by the noteholders at any time prior to
the maturity date. We can unilaterally convert the Spring 2008 Notes (i) on
or after September 30, 2008, if we have received one or more written firm
commitments, or have closed on one or more transactions, or a combination of the
foregoing, of at least $3 million gross proceeds of equity or debt; or
(ii) on the maturity date. Accordingly, the Spring 2008 Notes may be repaid
in cash or may be converted, at our sole option, into shares of our common
stock, on or before the maturity date of the Spring 2008 Notes.





Each
purchaser of the Spring 2008 Notes received, for no additional consideration,
two stock purchase warrants (a one-year warrant and a three-year warrant), each
of which entitles the holder to purchase the number of shares of our common
stock into which the holder’s Spring 2008 Note is convertible. The “Spring 2008
One-Year Warrants” expired on March 31, 2009 and were exercisable at $0.50
(originally $1.50) per share. The “Spring 2008 Three-Year Warrants” are
exercisable at an initial exercise price of $2.00 per share and expire on
March 31, 2011.





On
September 19, 2008, our Board of Directors reduced the exercise price of
the Spring 2008 One-Year Warrants from $1.50 per share (the original exercise
price pursuant to the terms of the Spring 2008 Offering) to $1.00 per share. On
January 16, 2009, our Board of Directors reduced the exercise price of the
Spring 2008 One-Year Warrants from $1.00 per share to $0.50 per share. (See Note
8.)




8




BIOLARGO,
INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






All of
these offerings and sales were made in reliance on the exemption from
registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public
offering of securities.




Note
5. Extension of Maturity Date of 2007 Offering




On June
30, 2009, we agreed to extend, by one year, the maturity dates of an aggregate
principal amount of $1,000,000 of promissory notes (the “2007 Notes”) issued in
the offering that commenced May 2007 (the “2007 Offering”). The 2007 Notes now
mature on June 30, 2010. The 2007 Notes bear interest at a rate of 10%
compounding annually, such interest to be paid, at our option, in cash or stock
at a conversion rate of $0.70 per share. The 2007 Notes are convertible into
shares of the Company’s common stock at an initial conversion price of $0.70 per
share, and can be converted voluntarily by the noteholders at any time. We can
elect to convert the 2007 Notes (i) on or after September 30, 2007, if
we have received one or more written firm commitments, or have closed on one or
more transactions, or a combination of the foregoing, of at least
$3 million gross proceeds of equity or debt; or (ii) on the Maturity
Date. Accordingly, on the Maturity Date, we may repay the 2007 Notes in cash or
choose to convert the notes, at our sole option, into shares of our common
stock.




Note
6.  Note Payable




On August
3, 2009, we received $70,000 and issued a promissory note with a maturity date
of October 31, 2009 which accrued interest at a rate of 10%.  For the
three-month period September 30, 2009 we recorded $1,170 of interest expense.
(See Note 14.)




Note
7. Issuance of Common Stock Options in exchange for payment of
payables




On
April 27, 2009, in an effort to preserve the Company’s cash and reduce
outstanding payables, we offered to third parties, officers and board members an
option (“Option”) to purchase common stock in lieu of cash payment to reduce
amounts we owed to these individuals. The Options may be exercised at $0.50
cents a share, an amount which was $0.20 cents a share above the $0.30 cents per
share closing price of our common stock on April 27, 2009, would be issued
pursuant to the Company’s 2007 Equity Incentive Plan, and would expire
April 27, 2012.





The
members of the Board, as well as the Company’s Chief Financial Officer, opted to
reduce their outstanding accrued and unpaid compensation by an aggregate
$150,000 in exchange for Options to purchase up to an aggregate 450,000 shares
of common stock. The Options issued to Board members Dennis P. Calvert and
Kenneth R. Code were issued at an exercise price of $0.55 per share, rather than
$0.50 per share. The fair value of these options resulted in additional expense
totaling $3,092 which was expensed during the three-month period ended June 30,
2009. In addition, seven individuals who provided services to the Company agreed
to reduce their payables by an aggregate $75,678 and accept Options to purchase
up to an aggregate 292,135 shares, under the terms set forth by the Board. The
fair value of these options resulted in additional expense totaling $5,849,
which was expensed during the three-month period ended June 30,
2009.





During
the nine-month periods ended September 30, 2008 and 2009 we recorded an
aggregate $519,193 and $478,288 in option compensation expense related to
options issued pursuant to the 2007 Plan.





On
April 27, 2009, New Millennium agreed to accept an option to purchase
common stock as payment of $230,658 of the outstanding $380,658 in accrued but
unpaid interest. The option allows New Millennium to purchase up to 691,974
shares of the Company’s common stock at $0.55 cents per share, on or before
April 27, 2012. New Millennium further agreed to extend the due date for
the remaining $150,000 accrued and unpaid interest to April 30, 2010. (See
Note 10.)





All of
these offerings and sales were made in reliance on the exemption from
registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public
offering of securities.




9


BIOLARGO,
INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Note
8. Warrants




Spring 2009
Warrants




From
April 2009 through September 30, 2009, we issued warrants to purchase up to an
aggregate 841,314 shares of our common stock to purchasers of our Spring 2009
Notes, consisting of Spring 2009 One-Year Warrants to purchase up to an
aggregate 420,657 shares which expire June 1, 2010, at an exercise price of
$0.75 per share, and Spring 2009 Three-Year Warrants to purchase up to an
aggregate 420,657 shares which expire June 1, 2012, at an exercise price of
$1.00 per share.




Fall 2008
Warrants




During
the six-month period ended June 30, 2009, we issued warrants to purchase up to
an aggregate 2,652,000 shares of our common stock to purchasers of our Fall 2008
Notes, consisting of Fall 2008 One-Year Warrants to purchase up to an aggregate
1,326,000 shares which expired October 15, 2009 and were exercisable at
$0.75 per share, and Fall 2008 Three-Year Warrants to purchase up to an
aggregate 1,326,000 shares which expire October 15, 2011, at an exercise
price of $1.00 per share.





During
2008 we issued warrants to purchase up to an aggregate of 240,000 shares of our
common stock to purchasers of our Fall 2008 Notes, consisting of Fall 2008
One-Year Warrants to purchase up to an aggregate 120,000 shares which expire
October 15, 2009, at an original exercise price of $1.00, and Fall 2008
Three-Year Warrants to purchase up to an aggregate 120,000 shares which expire
October 15, 2011, at an original exercise price of $2.00 per share. On
January 16, 2009, the exercise price of the Fall 2008 One-Year Warrants was
reduced from $1.00 to $0.75, and the exercise price of the Fall 2008 Three-Year
Warrants was reduced from $2.00 to $1.00, resulting in additional fair value
totaling $52,967, which is recorded as interest expense in the three-month
period ended March 31, 2009.




Other
Warrants




On March
31, 2009, a warrant to purchase up to 246,336 shares of our common stock at an
exercise price of $0.875, expired unexercised.





On
January 16, 2009, the exercise price of the Spring 2008 One-Year Warrants
was reduced from $1.50 to $1.00, resulting in an immaterial fair value
adjustment. These Spring 2008 One-Year Warrants to purchase up to an aggregate
676,775 shares of our common stock at an exercise price of $0.50, expired
unexercised on March 31, 2009.




On
September 13, 2009, we extended by one year, to September 13, 2010, the
expiration date  of the Fall 2006 Warrants, resulting in a fair value
of $370,768 which is recorded as discount on convertible notes, net of current
portion on our balance sheet. The Fall 2006 Warrants allow for the purchase up
to an aggregate 1,454,564 shares of our common stock at an exercise price of
$1.25.





We have
certain warrants outstanding to purchase our common stock, at various prices, as
described in the following table:




Number
      of
                          
                          
                          PriceShares
                          
                          
                          RangeOutstanding
      as of December 31, 2008
                          
                          
                          5,193,361
                          
                          
                          $
                          0.125
      – 2.00Issued
                          
                          
                          3,613,314
                          
                          
                          $
                          0.75
      – 1.00Exercised
                          
                          
                          —
                          
                          
                          $Expired
                          
                          
                          (923,111
                          )
                          
                          $
                          0.50
      – 0.875Outstanding
      as of September 30, 2009
                          
                          
                          7,883,564
                          
                          
                          $
                          0.125
      – 2.00





10




BIOLARGO,
INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


To
determine interest expense related to our outstanding warrants issued in
conjunction with debt offerings, the fair value of each award grant is estimated
on the date of grant using the Black-Scholes option-pricing model and the
calculated value is amortized over the life of the warrant. The determination of
expense of warrants issued for services or settlement also uses the
option-pricing model. The principal assumptions we used in applying this model
were as follows:




2008
                    
                    2009Risk
      free interest rate
                    
                    
                    2.11%
                    
                    0.52
      – 2.42%Expected
      volatility
                    
                    
                    310%
                    
                    253
      – 480%Expected
      dividend yield
                    
                    
                    —
                    
                    —Forfeiture
      rate
                    
                    
                    —
                    
                    —Expected
      life in years
                    
                    
                    1.50
                    
                    0.50
      – 3.00





The
risk-free interest rate is based on U.S Treasury yields in effect at the time of
grant. Expected volatilities are based on historical volatility of our common
stock. The expected term is presumed to be the mid-point between the vesting
date and the end of the contractual term.





The
aggregate fair value of the warrants issued and outstanding as of September 30,
2009 totaled $3,996,764. Of this total, $87,500 was related to warrants issued
to a consultant of which $35,000 was expensed during the year ended
December 31, 2008 and $52,500 was expensed during the three-month period
ended March 31, 2009. The remaining fair value of $3,909,224 was issued in
conjunction with our convertible notes and is recorded on our balance sheet as
discount on convertible notes net of amortization of $2,853,223. We recorded
$608,219 and $1,101,365 of interest expense related to the amortization of the
discount on convertible notes for the nine-month periods ended September 30,
2008 and 2009, respectively.




Note
9. Stockholders’ Equity




Preferred
Stock




Our
certificate of incorporation authorizes our Board of Directors to issue
preferred stock, from time to time, on such terms and conditions as they shall
determine. As of September 30, 2009 and December 31, 2008 there were no
outstanding shares of our preferred stock.




Common
Stock




As of
December 31, 2008 and September 30, 2009 there were 42,261,268 and
42,897,751 shares of common stock outstanding, respectively. The increase in
shares during the nine-month period ended September 30, 2009 is comprised of the
following stock issuances: (i) 216,123 shares of our common stock for accrued
and unpaid interest related to our 2007 Notes, (ii) 16,948 shares of our
common stock to a director in exchange for his services as a director,
(iii) 158,606 shares of our common stock in payment of rent pursuant to our
Sublease Agreement, and (iv) 244,806 shares of our common stock pursuant to
consulting agreements.




Note
10. Stock-Based Compensation and Other Employee Benefit Plans




2007 Equity Incentive
Plan




On
August 7, 2007, our Board of Directors adopted the BioLargo, Inc. 2007
Equity Incentive Plan (“2007 Plan”) as a means of providing our directors, key
employees and consultants additional incentive to provide services. Both stock
options and stock grants may be made under this plan. The Compensation Committee
administers this plan. The plan allows grants of common shares or options to
purchase common shares. As plan administrator, the Compensation Committee has
sole discretion to set the price of the options. The Compensation Committee may
at any time amend or terminate the plan.




11




BIOLARGO,
INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






Under
this plan, 6,000,000 shares of our common stock are reserved for issuance under
awards. Any shares that are represented by awards under the 2007 Plan that are
forfeited, expire, or are canceled or settled in cash without delivery of
shares, or that are forfeited back to us or reacquired by us after delivery for
any reason, or that are tendered to us or withheld to pay the exercise price or
related tax withholding obligations in connection with any award under the 2007
Plan, will again be available for awards under the 2007 Plan. Only shares
actually issued under the 2007 Plan will reduce the share reserve. If we acquire
another entity through a merger or similar transaction and issue replacement
awards under the 2007 Plan to employees, officers and directors of the acquired
entity, those awards, to the extent permitted under applicable laws and
securities exchange rules, will not reduce the number of shares reserved for the
2007 Plan.





The 2007
Plan imposes additional maximum limitations, which limitations will be adjusted
to take into account stock splits, reverse stock splits and other similar
occurrences. The maximum number of shares that may be issued in connection with
incentive stock options granted to any one person in any calendar year intended
to qualify under Internal Revenue Code Section 422 is 160,000 shares. The
maximum number of shares that may be subject to stock options or stock
appreciation rights granted to any one person in any calendar year is 200,000
shares, except that this limit is 400,000 shares if the grant is made in the
year of the recipient’s initial employment. The maximum number of shares that
may be subject to restricted stock or restricted stock units granted to any one
person in any calendar year is 200,000 shares.





The
maximum number shares that may be subject to awards granted to any one
Participant in any calendar year of (i) performance shares, and/or
performance units (the value of which is based on the Fair Market Value of a
share of our common stock), is 200,000 shares; and (ii) of performance
units (the value of which is not based on the Fair Market Value of a share of
our common stock) that could result a payment of more than
$500,000.




During
the nine-month period ended September 30, 2009, we granted options to purchase
shares of our common stock which aggregated to 120,000 shares, to our Chief
Financial Officer, pursuant to the terms of our engagement agreement with him.
These options are exercisable at various exercise prices ranging between $0.28
and $0.45 depending upon their respective dates of grant. The fair value of
these options totaled $43,100, all of which was expensed during the nine-month
period ended September 30, 2009, $13,300 was expensed during the three-month
period ended September 30, 2009. Each option is exercisable for ten years from
its respective date of grant.





On
April 27, 2009, in an effort to preserve the Company’s cash and reduce
outstanding payables, we offered to third parties, officers and board members an
option (“Option”) to purchase common stock in lieu of cash payment to reduce
amounts we owed to these individuals. The Options may be exercised at $0.50
cents a share, an amount which was $0.20 cents a share above the $0.30 cents per
share closing price of our common stock on April 27, 2009, would be issued
pursuant to the Company’s 2007 Equity Incentive Plan, and would expire
April27, 2012.





The
members of the Board, our Officer’s and vendors, opted to reduce their
outstanding accrued and unpaid compensation by an aggregate $150,000 in exchange
for Options to purchase up to an aggregate 450,000 shares of common stock. The
Options issued to Board members Dennis P. Calvert and Kenneth R. Code were
issued at an exercise price of $0.55 per share, rather than $0.50 per share. The
fair value of these options resulted in additional expense totaling $6,946. In
addition, five individuals who provided services to the Company agreed to reduce
their payables by an aggregate $75,678 and accept Options to purchase up to an
aggregate 292,135 shares, under the terms set forth by the Board. The fair value
of these options resulted in additional expense totaling $13,143.





During
the nine-month periods ended September 30, 2008 and 2009 we recorded an
aggregate $241,885 and $478,288 in option compensation expense related to
options issued pursuant to the 2007 Plan.




12




BIOLARGO,
INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






Activity
for our stock options under the 2007 Plan for the nine-month period ended
September 30, 2009 is as follows:




WeightedAverageOptions
                                                      
                                                      Shares
                                                      
                                                      Price per
                                                      
                                                      Price
      perOutstanding
                                                      
                                                      Available
                                                      
                                                      share
                                                      
                                                      shareBalances,
      December 31, 2008
                                                      
                                                      785,000
                                                      
                                                      5,215,000
                                                      
                                                      $
                                                      0.35
      – $1.89
                                                      
                                                      $
                                                      1.02Granted
                                                      
                                                      832,136
                                                      
                                                      (832,136
                                                      )
                                                      $
                                                      0.28
      – $0.55
                                                      
                                                      $
                                                      0.49Exercised
                                                      
                                                      —
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —Canceled
                                                      
                                                      —
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —Balances,
      September 30, 2009
                                                      
                                                      1,617,136
                                                      
                                                      4,382,865
                                                      
                                                      $
                                                      0.28
      – $1.89
                                                      
                                                      $
                                                      0.73




The
following table summarizes the stock options issued under the 2007 Equity Plan
outstanding at September 30, 2009.




Weighted
                
                
                
                
                
                
                Currently
      ExercisableAverage
                
                
                Weighted
                
                
                Number
      ofRemaining
                
                
                Average
                
                
                Shares
      at
                
                
                WeightedContractual
                
                
                Exercise
                
                
                September
      30,
                
                
                AverageOptions
      Outstanding at September 30, 2009
                
                
                Exercise
      Price
                
                Life
                
                
                Price
                
                
                2009
                
                
                Exercise
      Price20,000
                
                
                $           0.40
                
                
                10
                
                
                $
                0.40
                
                
                
                20,000
                
                
                $
                0.40605,000
                
                
                $0.94
      – 1.03
                
                
                10
                
                
                $
                0.97
                
                
                
                105,000
                
                
                $
                0.9450,000
                
                
                $           1.89
                
                
                10
                
                
                $
                1.89
                
                
                
                50,000
                
                
                $
                1.89110,000
                
                
                $0.35
      – 1.65
                
                
                10
                
                
                $
                1.04
                
                
                
                110,000
                
                
                $
                1.04120,000
                
                
                $0.28
      – 0.50
                
                
                10
                
                
                $
                0.40
                
                
                
                120,000
                
                
                $
                0.40592,135
                
                
                $           0.50
                
                
                3
                
                
                $
                0.50
                
                
                
                592,135
                
                
                $
                0.50120,000
                
                
                $   
             0.55
                
                
                3
                
                
                $
                0.55
                
                
                
                120,000
                
                
                $
                0.55




Stock Options Issued Outside
the 2007 Equity Incentive Plan




On
January 10, 2008, pursuant to consulting agreements with Jeffrey C. Wallace
and Robert J. Szolomayer, we issued options outside the 2007 Equity Plan to
purchase 2,400,000 shares of our common stock at $0.99 per share. Each option is
exercisable for five years, and vests in four equal installments commencing on
the date of the respective consulting agreement and continuing on each of
December 31, 2008, December 31, 2009 and December 31, 2010 (each,
an “Option Vesting Date”); provided that no additional portion of each option
shall vest if Mr. Wallace or Mr. Szolomayer, as the case may be, is
not providing services under his consulting agreement as of such Option Vesting
Date. The fair value of these options was $2,358,240, and for the nine-month
periods ended September 30, 2008 and 2009 we recognized $1,032,840 and $445,500
of consulting expense, respectively.





On
April 30, 2007, we issued an option outside the 2007 Equity Plan to our
Chief Executive Officer to purchase 7,733,259 shares of our common stock at
$0.18 per share, a discount to the $0.37 closing price on the date of issuance.
This option vests over three years in equal amounts on the anniversary date, and
expires ten years from the date of issuance. The fair value of this option was
$2,861,306, and for the nine -month periods ended September 30, 2008 and 2009 we
recognized $715,326 of compensation expense.





On April
27, 2009, we issued an option to purchase 691,974 shares of our common stock to
New Millennium in exchange for the reduction of accrued and unpaid interest.
(See Note 12.) The fair value of this option resulted in additional expense
totaling $40,059.





We
recognize compensation expense for stock option awards on a straight-line basis
over the applicable service period of the award, which is the vesting period.
Share-based compensation expense is based on the grant date fair value estimated
using the Black-Scholes Option Pricing Model. The following methodology and
assumptions were used to calculate share based compensation for the three-month
periods ended September 30, 2008 and 2009:




13




BIOLARGO,
INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






Non
      plan
                
                2007Option
                
                PlanRisk
      free interest rate
                
                1.50%
                
                1.5
      – 3.00%Expected
      volatility
                
                482%
                
                482
      – 769%Expected
      dividend yield
                
                —
                
                —Forfeiture
      rate
                
                —
                
                —Expected
      life in years
                
                3
                
                3




Expected
price volatility is the measure by which our stock price is expected to
fluctuate during the expected term of an option. Expected volatility is derived
from the historical daily change in the market price of our common stock, as we
believe that historical volatility is the best indicator of future
volatility.





Following
the guidance of Staff Accounting Bulletin No. 107, we follow the “shortcut”
method to determine the expected term of plain vanilla options issued to
employees and Directors. The expected term is presumed to be the mid-point
between the vesting date and the end of the contractual term.





The
risk-free interest rate used in the Black-Scholes calculation is based on the
prevailing U.S Treasury yield as determined by the U.S. Federal Reserve. We have
never paid any cash dividends on our common stock and do not anticipate paying
cash dividends on our common stock in the foreseeable future.





Stock-based
compensation expense recognized in the consolidated statements of operations is
based on awards ultimately expected to vest, reduced for estimated forfeitures.
Forfeitures are estimated at the time of grant, and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
Historically, we have not had significant forfeitures of unvested stock options
granted to employees and Directors. A significant number of our stock option
grants are fully vested at issuance or have short vesting provisions. Therefore,
we have estimated the forfeiture rate of our outstanding stock options as
zero.




Note
11. Accounts Payable and Accrued Expenses




Accounts
payable and accrued expenses included the following:




December
      31,
                            
                            
                            September
      30,2008
                            
                            
                            2009Accounts
      payable and accrued expenses
                            
                            $
                            302,518
                            
                            
                            $
                            487,186Accrued
      interest
                            
                            
                            560,031
                            
                            
                            
                            423,138Officer
      and Board of Director payable
                            
                            
                            130,882
                            
                            
                            
                            291,110Total
      Accounts Payable and Accrued Expenses
                            
                            $
                            993,431
                            
                            
                            $
                            1,201,434





On
April 27, 2009, in an effort to preserve the Company’s cash and reduce
outstanding payables, the Board offered to third parties, a related party,
officers and board members an option (“Option”) to purchase shares of our common
stock in lieu of cash payment to reduce amounts owed by the
Company.





Accounts
payable and accrued expenses were reduced as certain vendors, consultants and
professionals agreed to accept options to purchase shares of our common stock as
payment of an aggregate $75,678, of which $45,543 was outstanding as of December
31, 2008, and the balance of $30,135 related to expenses incurred in the
three-month period ended March 31, 2009. (See Note 7.)





Accrued
interest as of December 31, 2008, includes $380,658 of accrued and unpaid
interest related to a note previously held by New Millennium Capital Partners,
LLC (“New Millennium”), a related party. The interest owed to New Millennium
does not accrue additional interest (see Note 12). On April 27, 2009, New
Millennium agreed to accept from the Company an option to purchase common stock
as payment of $230,658 of the outstanding $380,658 in accrued but unpaid
interest. The option will allow New Millennium to purchase up to 691,974 shares
of the Company’s common stock at $0.55 cents per share. (See Note 7.) New
Millennium further agreed to extend the due date for the remaining $150,000
accrued and unpaid interest to April 30, 2010. The remaining $273,138 of
accrued and unpaid interest relates to outstanding convertible promissory notes
issued by the Company pursuant to its sale of unregistered
securities.  (See Note 4.)





During
the nine-month period ended September 30, 2009, we paid $90,363 of outstanding
interest by issuing an aggregate 216,123 shares of common stock, pursuant to the
terms of certain promissory notes issued pursuant to the Spring 2008 Offering,
issued at prices ranging from $0.37 to $0.47 per share.




14




BIOLARGO,
INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






During
the nine-month periods ended September 30, 2008 and 2009, we recorded $185,904
and $205,308, respectively, of interest expense related to the convertible notes
outstanding.





Our
Officers and board of directors agreed to accept an option to purchase shares of
our common stock as payment of $150,000 of accounts payable and accrued
expenses, of which $140,000 were outstanding as of December 31, 2008 and the
balance of $10,000 related to board of director expense incurred in 2009. (See
Note 7.)




Note
12. Related Party Transaction




New
Millennium




In
March 2003, New Millennium, a company controlled by our president and chief
executive officer, Dennis Calvert, purchased from a third party a promissory
note in the principal amount of $1,120,000 we assumed pursuant to a licensing
transaction in October 2002.





On
April 28, 2006, New Millennium agreed to amend the terms of the $1,120,000
promissory note (the “New Millennium Note”) to (i) extend the due date to
January 15, 2008; (ii) waive any payments of interest until it becomes
due; (iii) reduce the principal amount from $1,120,000 to $900,000, equal
to a 19.6% reduction; and (iv) correspondingly reduce the accrued but
unpaid interest due under the terms of the note from $318,000 to $256,000, also
equal to a 19.6% reduction.





On
April 13, 2007, we entered into an agreement with New Millennium whereby
the $900,000 principal amount of the New Millennium Note was converted into
1,636,364 shares of our common stock, at a price of $0.55 per share, which was
the last bid price on the date of conversion. The remaining accrued but unpaid
interest in the amount of $380,658 was not converted, and the parties agreed
that no further interest would accrue, and that the interest would be paid on or
before January 15, 2008, subsequently extended to April 30, 2009 by
the Board of Directors and New Millennium.





On
April 27, 2009, New Millennium agreed to accept an option to purchase
common stock as payment of $230,658 of the outstanding $380,658 in accrued but
unpaid interest. The option allows New Millennium to purchase up to 691,974
shares of the Company’s common stock at $0.55 cents per share, on or before
April 27, 2012. New Millennium further agreed to extend the due date for the
remaining $150,000 accrued and unpaid interest to April 30, 2010. (See
Notes 7, 10 and 11.)




Note
13. Commitments and Contingencies




Litigation




From time
to time, we are party to various claims, legal actions and complaints arising
periodically in the ordinary course of our business. In the opinion of
management, no such matters will have a material adverse effect on our financial
position or results of operations.




Stock-Based
Commitments




We have
utilized and presently utilize the services of a number of consultants who have
been and are compensated with shares of our common stock or securities
convertible into or exercisable for shares of our common stock. Therefore, we
may be obligated to issue additional securities to these consultants pursuant to
the terms of our arrangements or agreements with them.




15


BIOLARGO,
INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


C.F.O Agreement
Extension




On
February 23, 2009, BioLargo, Inc. (the “Company”) and its Chief Financial
Officer Charles K. Dargan, II agreed to extend the engagement agreement dated
February 1, 2008 (the “Engagement Agreement”), pursuant to which
Mr. Dargan served as the Company’s Chief Financial Officer for a period of
one year, expiring January 31, 2009. The Engagement Extension Agreement
dated as of February 1, 2009 (the “Engagement Extension Agreement”)
provides for an additional one-year term effective February 1, 2009 (the
“Extended Term”). During the Extended Term, Mr. Dargan will continue to
receive a fee of $4,000 per month, which amount will be increased to $8,000 or
more in months during which the Company files its periodic reports with the
Securities and Exchange Commission.





In
addition to the cash compensation specified above, Mr. Dargan will be
issued stock options over the Extended Term as follows:





•
            
            an
      option to purchase 50,000 shares of the Company’s common stock, granted on
      February 23, 2009, at an exercise price equal to the closing price of
      a share of the Company’s common stock on the grant date, such option to
      vest in full 90 days after grant; and•
            
            options
      to purchase 10,000 shares of the Company’s common stock, each such option
      to be granted on the last day of each month commencing April 2009 and
      ending January 2010, provided that the Engagement Extension Agreement
      with Mr. Dargan has not been terminated prior to each such grant date, at
      an exercise price equal to the closing price of a share of the Company’s
      common stock on each grant date, each such option to be fully vested upon
      grant.





All other
provisions of the Engagement Agreement not expressly amended pursuant to the
Engagement Extension Agreement remain the same, including provisions regarding
indemnification and arbitration of disputes.




Note
14. Subsequent Events




Stock
Issuances




Subsequent
to September 30, 2009, we issued an aggregate 200,160 shares of our common
stock. Of the total, (i) 49,515 shares of our common stock were issued as
payment of obligations related to third party consultants and vendors, (ii)
112,198 shares of our common stock were issued as payment of $42,211 of
accrued and unpaid interest due on promissory notes issued in our Fall 2008
Offering (see Note 4), and (iii) 38,477shares of our common stock were issued as
payment of rental obligations pursuant to our Sublease agreement.




Spring 2009
Offering




Subsequent
to September 30, 2009, we received $290,000 from seven investors, and issued
Spring 2009 Notes, the principal amount of which allow for conversion into an
aggregate 527,276 shares of our common stock, issued Spring 2009 One-Year
Warrants that allow purchase of up to an aggregate 527,276 shares of our common
stock, and issued Spring 2009 Three-Year Warrants that allow purchase of up to
an aggregate 527,276 shares of our common stock.




All of
these offerings and sales were made in reliance on the exemption from
registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public
offering of securities.




Extension of Maturity Date
of Note Payable




On August
3, 2009, we received $70,000 and issued a promissory note with a maturity date
of October 31, 2009. (See Note 6.) On October 31, 2009, the maturity date of
this promissory note was extended to February 1, 2010.




16




Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




This
Quarterly Report on Form 10-Q of BioLargo, Inc. (the “Company”) contains
forward-looking statements. These forward-looking statements include predictions
regarding, among other things, our:




•
              
              our
      business plan;•
              
              the
      commercial viability of our technology and products incorporating our
      technology;•
              
              the
      effects of competitive factors on our technology and products
      incorporating our technology;•
              
              expenses
      we will incur in operating our business;•
              
              our
      liquidity and sufficiency of existing cash; and•
              
              the
      success of our financing
plans.




You
can identify these and other forward-looking statements by the use of words such
as “may”, “will”, “expects”, “anticipates”, “believes”, “estimates”,
“continues”, or the negative of such terms, or other comparable terminology.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing statements.




Such
statements, which include statements concerning future revenue sources and
concentrations, selling, general and administrative expenses, research and
development expenses, capital resources, additional financings and additional
losses, are subject to risks and uncertainties, including, but not limited to,
those discussed elsewhere in this Form 10-Q, that could cause actual results to
differ materially from those projected.




Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2008. Unless otherwise expressly stated herein, all
statements, including forward-looking statements, set forth in this Form 10-Q
are as of September 30, 2009, unless expressly stated otherwise, and we
undertake no duty to update this information.




As used
in this Report, the term Company refers to BioLargo, Inc., a Delaware
corporation, and its wholly-owned subsidiary, BioLargo Life Technologies, Inc.,
a California corporation.




The
following discussion and analysis should be read in conjunction with our
unaudited consolidated financial statements and the related notes to the
consolidated financial statements included elsewhere in this
report.




Overview




By
leveraging our suite of patented and patent-pending intellectual property, which
we refer to as the BioLargo technology, our business strategy is to harness and
deliver nature’s best disinfectant — iodine — in a safe, efficient,
environmentally sensitive and cost-effective manner. The centerpiece of our
BioLargo technology is CupriDyneTM, which works by combining minerals with water
from any source and delivering “free iodine” on demand, in controlled dosages,
in order to balance efficacy of disinfectant performance with concerns about
toxicity.




In
addition to our BioLargo technology, in 2008 we acquired the rights to market an
iodine based water disinfection system (the “Isan system”) from Ioteq IP Pty.
Ltd., an Australian company, and its U.S. affiliate Ioteq Inc. The
Isan system is an automated water disinfection system that substantially reduces
the incidence of fungal growth, spoilage, organisms and pathogens in water and
on food. Capable of treating high volumes of water flow, the Isan system is a
combination of electrodes for measuring iodine levels in the target water
stream, a control unit which automatically controls the running of the
system, iodine canisters to deliver the iodine, and resin canisters to collect
by-products after disinfection has been completed. The Isan system is registered
with the APVMA (Australian Pesticides and Veterinary Medicines Authority) and
FSANZ (Food Standards Australia and New Zealand) in Australia and New Zealand,
where it has approximately 150 customer installations currently operating. Ioteq
and its Isan system were honored in early 2009 as a Top 50 Water Company for the
21st
Century by the Artemis Project.




17




Both our
BioLargo technology and the Isan system have potential commercial applications
within global industries, including but not limited to agriculture, animal
health, beach and soil environmental remediation, consumer products, food
processing, medical, and water industries. While we believe the potential
applications are many, we are currently focused in two primary areas — the
development of certain products designed for the animal health industry, and
agriculture.




First, we
are focused on commercializing our BioLargo technology and the Isan system in
products applicable to the agriculture industry. We are actively seeking to
secure strategic partners to either license or partner with to exploit
commercial opportunities for CupriDyne and for the Isan system. The Isan related
opportunities are focused primarily on post-harvest treatment of fruits and
vegetables, irrigation supply, and hydroponic growers. We continue to work with
a number of very large global companies who are engaged in technology evaluation
and testing processes. Simultaneously, we are also actively seeking to identify
and negotiate regional or global partnerships to exploit commercial
opportunities for these technologies. No such regional or global partnerships
have been formed at this time, and we can make no representation about its
ability to successfully conclude such partnership arrangements.




Second,
in 2009 we introduced animal health products under the brand name
“Odor-No-More”, and continue development of additional products.




Although
we are focused primarily on odor control products and agriculture, we also
intend to continue to advance our intellectual property, product designs and
licensing opportunities for our technology for use in other industries, as
capital resources are available to support these efforts.




Odor-No-More




During
2008 we identified and began development of three products incorporating our
BioLargo technology targeted to the animal health marketplace, the primary
product advantages help customers save time and money while controlling odor and
moisture. In 2009,
we have begun selling these products under the “Odor-No-More” brand
name:




1.
            Animal
      Bedding Additive (for horses/livestock, small animals, reptiles, and
      birds)


2.
            Cat
      Litter Additive


3.
            Facilities
      and Equipment Wash





We have
established local third party manufacturing and packaging for the products, as
well as alternative manufacturing facilities in other parts of the United
States. On May 13, 2009, as a result of our test marketing efforts, we
announced the launch of our initial three Odor-No-More branded products. Since
that time, we have signed national distributors in the animal care market, one
of the largest catalog and eCommerce animal health supply retailers, a
distributor in the exotic animal care market, and are currently in discussions
with other industry leaders. We received our first large commercial order for
Odor-No-More products, from national distributor E.T. Horn Company, in June
2009, and as of the quarterly period ended September 30, 2009, earned revenue.
With over 9,000,000 horses in the United States, and 39 billion dollars of
equine products and services sold annually, our advertising efforts have
initially focused on the equine industry.




As part
of our promotional and advertising campaign we are sponsoring and participating
in equestrian events, local fairs, trade shows, horse and livestock shows, and a
horse rescue organization.




In
September 2009, we launched three new bedding additive products for small
animals, birds and reptiles. We plan to market these products to the pet
industry in the near future.




A number
of our Odor-No-More products may be eligible for certain regulated claims. While
we are not required to pursue such claims, it may, at some point in the future,
be in the best interests of the Company to work towards and pursue additional
regulated marketing claims to further differentiate the products in the
marketplace as financial resources are more readily available.




18




Results
of Operations—Comparison of the three- and nine-month periods ended September
30, 2008 and 2009




Our first
commercial products based on our BioLargo technology were launched May 2009. We
generated revenues of $115,741 during the nine-month period ended September 30,
2009. During the nine-month period ended September 30, 2009, we incurred a net
loss of $5,303,315. Of this amount, $2,585,854 consists of non-cash expenses
related to the issuances of stock options, warrants and stock for services and
$837,576 of expense related to the amortization of our intangible assets. During
that time, we commercially launched our Odor-No-More branded products, continued
research and development on our technologies, and continued our efforts to
market the Isan system.




Revenue




We
generated $115,741 and $115,741 in revenues from operations during the three and
nine-month periods ended September 30, 2009, compared to zero revenues during
the three and nine-month periods ended September 30, 2008. The revenues consist
entirely of sales of our Odor-No-More products, which we commercially launched
in May 2009.




Selling, General and
Administrative Expense




Selling,
General and Administrative expenses were $919,103 and $3,056,771 for the three-
and nine-month periods ended September 30, 2009, compared to $915,101 and
$3,865,758 for the three- and nine-month periods ended September 30, 2008,
an increase of $4,002 and a decrease of $808,987, respectively. The largest
components of these expenses were:




a.           Salaries
and Payroll-related Expenses: These expenses were $458,250 and $1,392,843 for
the three- and nine-month periods ended September 30, 2009, compared to
$449,837 and $1,398,506 for the three- and nine-month periods ended
September 30, 2008, an increase of $8,413 and a decrease of $5,663,
respectively. Of these amounts, non-cash stock option expenses comprised
$925,861 during the nine-month period ended September 30, 2009, compared to
$998,506 during the same period in 2008.




b.           
Consulting Expenses: These expenses were $260,444 and $808,991 for the three-
and nine-month periods ended September 30, 2009, compared $238,270 and
$1,606,018 for the three- and nine-month periods ended
September 30, 2008, an increase of $22,174 and a decrease of $797,027,
respectively.  The increase in the three-month period September 30,
2009, is related to increased expenses associated with the launch of our
Odor-No-More products. The decrease in the nine-month period ended September 30,
2009 is primarily attributable to non-cash stock option compensation expenses
incurred in 2008, related to the vesting schedule of the options issued in
connection with the long-term consulting agreements with Robert Szolomayer, our
Director of Corporate Development, and Jeffrey Wallace, our Director of Sales
and Marketing, both of which began in January 2008, as well as a warrants
that vested in the three- and nine-month periods ended September 30, 2008
related to consultants and other professional advisors.




c.           Professional
Fees:  These expenses were $76,602 and $230,526 for the three- and
nine-month periods ended September 30, 2009, compared to $120,851 and
$475,343 for the three- and nine-month periods ended September 30, 2008, a
decrease of $44,249 and $244,817, respectively.  The decrease in the
three- and nine-month periods ended September 30, 2009 is primarily
attributable to a comparative reduction in legal fees resulting from a reduced
need for those services.




d.           Other
Expense: These expenses were $60,000 and $170,000 for the three- and nine-month
periods ended September 30, 2009, compared to $20,000 and $0 for the three- and
nine-month periods ended September 30, 2008. The expenses incurred in 2008 and
2009 were the result of expense pursuant to a marketing agreement with Ioteq
which was executed in September 2008.




Interest
expense





Interest
expense totaled $454,429 and $1,329,235 for the three- and nine-month periods
ended September 30, 2009, compared to $300,912 and $794,123 for the three-
and nine-month periods ended September 30, 2008, an increase of $153,517 and
$535,112, respectively. Our interest expenses are primarily comprised of two
components – interest due on debt obligations, and fair value expense associated
with warrants issued in our private offerings. Our interest expense continues to
increase as we continue to raise money, and issue promissory notes and related
warrants, through our private security offerings.




19





Research and
Development





Research
and development expenses were $39,319 and $132,637 for the three- and nine-month
periods ended September 30, 2009, compared to $54,456 and $148,100 for the
three- and nine-month periods ended September 30, 2008, a decrease of
$15,137 and a decrease of $15,503, respectively. These decreases relate to a
slight decrease in legal patent activity in 2009 as compared with
2008.





Net Loss





Net loss
for the three- and nine-month periods ended September 30, 2009 was
$1,640,703 and $5,303,315, or a loss of $0.04 and $0.12 per share, compared to a
net loss for the three- and nine-month periods ended September 30, 2008 of
$1,545,954 and $5,622,496, or a loss of $0.04 and $0.13 per share, respectively.
The net loss for the nine-month period decreased due to the aforementioned
decrease in consulting fees and professional fees, partially offset by the
increase in interest expense and in other expense related to the marketing
agreement with Ioteq, and to a new contract with a consultant to provide
technical services related to our technologies. The net loss for the three-month
period September 30, 2009 increased due to the increase in interest expense
and in other expense related to the marketing agreement with Ioteq. The net loss
per share was unchanged for the three-month periods ended September 30,
2009 and 2008, and decreased by $0.01 cents as compared to the three- and
nine-month periods ended September 30, 2009 and 2008 due to the reduction
of consulting fees and an increase in the comparable number of weighted average
shares outstanding.





Liquidity and Capital
Resources





We have
been, and anticipate that we will continue to be, limited in terms of our
capital resources. Until we are successful in commercializing products or
negotiating and securing payments for licensing rights from prospective
licensing candidates, we expect to continue to have operating losses. Cash and
cash equivalents totaled $138,692 at September 30, 2009. We had negative
working capital of $3,421,873 for the nine-month period ended September 30,
2009, compared with negative working capital of $1,772,411 for the nine-month
period ended September 30, 2008. We had negative cash flow from operating
activities of $891,102 for the nine-month period ended September 30, 2009,
compared to a negative cash flow from operating activities of $1,574,899 for the
nine-month period ended September 30, 2008. We primarily used cash from
financing activities to fund operations. Our cash position is insufficient to
meet our continuing anticipated expenses or fund anticipated operating expenses.
Accordingly, we will be required to raise significant additional capital to
sustain operations and further implement our business plan and we may be
compelled to reduce or curtail certain activities to preserve cash.





The
financial statements accompanying this report have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of our business. As
reflected in the accompanying financial statements, we had a net loss of
$5,303,315 for the nine-month period ended September 30, 2009, and an
accumulated stockholders’ deficit of $47,459,347 as of September 30, 2009.
The foregoing factors raise substantial doubt about our ability to continue as a
going concern. Ultimately, our ability to continue as a going concern is
dependent upon its ability to attract significant new sources of capital, attain
a reasonable threshold of operating efficiencies and achieve profitable
operations by licensing or otherwise commercializing products incorporating our
BioLargo technology. The financial statements do not include any adjustments
that might be necessary if we are unable to continue as a going
concern.





As of
September 30, 2009 we had $2,937,985 aggregate principal amount, together
with $273,138 accrued and unpaid interest, outstanding on various promissory
notes. We may pay all of these amounts in cash or in stock, at our option, at
maturity. In addition, as of September 30, 2009, we had $778,296 in accrued
and unpaid payables, including officer and director payables. Due to our limited
cash resources, our payables increased during the nine-month period ended
September 30, 2009. In addition, as of September 30, 2009, we owed
$150,000 in accrued and unpaid interest to New Millennium Capital Partners, LLC,
an entity controlled by Dennis P. Calvert, our President and Chief Executive
Officer.




20





We will
be required to raise substantial additional capital to expand our operations,
including without limitation, hiring additional personnel, additional scientific
and third-party testing, costs associated with obtaining regulatory approvals
and filing additional patent applications to protect our intellectual property,
and possible strategic acquisitions or alliances, as well as to meet our
liabilities as they become due for the next 12 months. We may also be
compelled to reduce or curtail certain activities to preserve cash. During the
nine-month period ended September 30, 2009, we received gross and net
proceeds of $869,410 pursuant to private offerings of our
securities.





We are
continuing to explore numerous alternatives for our current and longer-term
financial requirements, including additional raises of capital from investors in
the form of convertible debt or equity. To fully implement our business plan, we
believe that we must raise up to an additional $10 million in financing.
There can be no assurance that we will be able to raise any additional capital.
No commitments are in place as of the date of the filing of this report for any
such additional financings. Moreover, in light of the current unfavorable global
economic conditions, we can not make assurances that any such financing is
likely to be in place in the immediate future.





It is
also unlikely that we will be able to qualify for bank or other financial
institutional debt financing until such time as our operations are considerably
more advanced and we are able to demonstrate the financial strength to provide
confidence for a lender, which we do not currently believe is likely to occur
for at least the next 12 months or more.





If we are
unable to raise sufficient capital, we may be required to curtail some of our
operations, including efforts to develop, test, market, evaluate, license and
legally protect our BioLargo technology. If we were forced to curtail aspects of
our operations, there could be a material adverse impact on our intellectual
property, financial condition and results of operations.




Obligation to New Millennium
Capital Partners, LLC




In March
2003, New Millennium, a company controlled by our president and chief executive
officer, Dennis P. Calvert, purchased from a third party a promissory note
in the principal amount of $1,120,000 we assumed pursuant to a licensing
transaction in October 2002.




On
April 28, 2006, New Millennium agreed to amend the terms of the $1,120,000
promissory note (the “New Millennium Note”) to (i) extend the due date to
January 15, 2008; (ii) waive any payments of interest until it becomes
due; (iii) reduce the principal amount from $1,120,000 to $900,000, equal
to a 19.6% reduction; and (iv) correspondingly reduce the accrued but
unpaid interest due under the terms of the note from $318,000 to $256,000, also
equal to a 19.6% reduction.




On
April 13, 2007, we entered into an agreement with New Millennium whereby
the $900,000 principal amount of the New Millennium Note was converted into
1,636,364 shares of our common stock, at a price of $0.55 per share, which was
the last bid price on the date of conversion. The remaining accrued but unpaid
interest in the amount of $380,658 was not converted, and the parties agreed
that no further interest would accrue, and that the interest would be paid on or
before January 15, 2008. On November 12, 2008, Mr. Calvert and we further
extended the date on which interest would be paid to April 30,
2009.




On
April 27, 2009, New Millennium agreed to accept as payment of $230,658 of
the outstanding $380,658 in accrued but unpaid interest an option to purchase
691,974 shares of the Company’s common stock, exercisable at 55 cents per share.
The expiration date of the option is April 24, 2012. New Millennium further
agreed to extend the due date for the remaining $150,000 unpaid interest to
April 30, 2010.




2007 Equity Incentive
Plan




On
April 27, 2009, in an effort to preserve the Company’s cash and reduce
outstanding payables, the Board offered to third parties, officers and board
members an option (“Option”) to purchase common stock in lieu of cash payment to
reduce amounts owed by the Company. The Options may be exercised at $0.50 cents
a share, an amount which was 20 cents a share above the $0.30 per share closing
price of the Company’s common stock on April 27, 2009, would be issued
pursuant to the Company’s 2007 Equity Incentive Plan, and would expire
April 27, 2012.




21




The
members of the Board, as well as the Company’s Chief Financial Officer, opted to
reduce their outstanding accrued and unpaid compensation by an aggregate
$150,000 in exchange for Options to purchase up to an aggregate 450,000 shares
of common stock. The Options issued to Board members Dennis P. Calvert and
Kenneth R. Code were issued at an exercise price of $0.55 per share, rather than
$0.50 per share. In addition, seven individuals who provided services to the
Company agreed to reduce their payables by an aggregate $99,378 and accept
Options to purchase up to an aggregate 298,135 shares, under the terms set forth
by the Board.




Critical
Accounting Policies




Our
discussion and analysis of our results of operations and liquidity and capital
resources are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities. On
an ongoing basis, we evaluate our estimates and judgments, including those
related to revenue recognition, valuation of intangible assets and investments,
and share-based payments. We base our estimates on anticipated results and
trends and on various other assumptions that we believe are reasonable under the
circumstances, including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. By their nature,
estimates are subject to an inherent degree of uncertainty. Actual results that
differ from our estimates could have a significant adverse effect on our
operating results and financial position. We believe that the following
significant accounting policies and assumptions may involve a higher degree of
judgment and complexity than others.




The
methods, estimates and judgments the Company uses in applying these most
critical accounting policies have a significant impact on the results of the
Company reports in its financial statements.




We
anticipate that revenue will come from two sources: sales of Odor-No-More
products and from royalties and license fees from our intellectual property.
Odor-No-More revenue is recognized upon shipment of the product and all other
contingencies have been met. Licensees typically pay a license fee in one or
more installments and ongoing royalties based on their sales of products
incorporating or using our licensed intellectual property. License fees are
recognized over the estimated period of future benefit to the average
licensee.




The
Company has established a policy relative to the methodology to determine the
value assigned to each intangible acquired with or licensed by the Company
and/or services or products received for non-cash consideration of the Company’s
common stock. The value is based on the market price of the Company’s common
stock issued as consideration, at the date of the agreement of each transaction
or when the service is rendered or product is received, as adjusted for
applicable discounts.




It the
Company’s policy to expense share based payments as of the date of grant.We
utilize the Black Scholes model for valuing options for which requires
significant judgment regarding the assumptions used in the selected option
pricing model, including stock price volatility and employee exercise behavior.
Most of these inputs are either highly dependent on the current economic
environment at the date of grant or forward-looking expectations projected over
the expected term of the award. As a result, the actual impact of adoption on
future earnings could differ significantly from our current
estimate.




Recent
Accounting Pronouncements




Only July
1, 2009, the Financial Accounting Standards Board (FASB) launched the FASB Accounting Standards
Codificationas the single source of authoritative nongovernmental U.S.
generally accepted accounting principles (GAAP). The Codification is effective
for interim and annual periods ending after September 15, 2009. All existing
accounting standards documents are superseded as described in FASB Statement No.
168, TheFASB
Accounting Standards Codification  and the Hierarchy of Generally
Accepted Accounting Principles. All other accounting literature not
included in the Codification is nonauthoritative.




22




Other
recent accounting pronouncements issued by FASB (including its Emerging Issued
Task Force), the American Institute of Certified Public Accountants and the SEC
did not or are not believed by management to have a material impact on the
Company’s present or future consolidated financial statements.




Item 4.
            Controls
      and Procedures




(a) Evaluation
of disclosure controls and procedures.




We
conducted an evaluation, under the supervision and with the participation of
management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this Report.




Our
procedures have been designed to ensure that the information relating to our
company, including our consolidated subsidiary, required to be disclosed in our
SEC reports is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate to allow for timely decisions regarding required
disclosure.




Based on
this evaluation, our chief executive officer and chief financial officer
concluded that as of the evaluation date our disclosure controls and procedures
need improvement. Additionally, due to limited personnel and the resulting
competing demands on our senior officers, at times there have been delays in
disseminating information internally to those parties responsible for processing
such information for disclosure. We have implemented certain further steps that
we believe are warranted and believe, subject to our continuing evaluation and
review of these further steps, that yet additional steps may also be warranted.
In February 2008, we hired a Chief Financial Officer who is a Certified
Public Accountant. We have also adopted disclosure controls and procedures
guidelines. Additional steps that we believe that we must undertake are to
retain a consulting firm to, among other things, design and implement adequate
systems of accounting and financial statement disclosure controls during the
current fiscal year to comply with the requirements of the SEC. We believe that
the ultimate success of our plan to improve further our internal controls over
financial reporting and disclosure controls and procedures will require a
combination of additional financial resources, outside consulting services,
legal advice, additional personnel, further reallocation of responsibility among
various persons, improved lines of communication internally and substantial
additional training of those of our officers, personnel and others, including
certain of our directors such as our committee chairs, who are charged with
implementing and/or carrying out our plan.




It should
be noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.




(b) Changes
in internal control over financial reporting. There was no change in our
internal control over financial reporting that occurred during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.




23




PART
II





OTHER
INFORMATION






Item 2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds




Spring 2009
Offering




In
April 2009 we commenced a private offering (the “Spring 2009 Offering”) of
up to $1,000,000 of our 10% convertible promissory notes due June 1, 2012 (the
“Spring 2009 Notes”), subject to an over-allotment option of 15%, or an
aggregate $1,150,000 principal amount of Spring 2009 Notes.  We can
unilaterally convert the Spring 2009 Notes (i) on or after December 15,
2009, if we have received one or more written firm commitments, or have closed
on one or more transactions, or a combination of the foregoing, of at least
$3 million gross proceeds of equity or debt; or (ii) on the maturity
date. Accordingly, the Spring 2009 Notes may be repaid in cash or may be
converted, at the noteholders’ option or our option, into shares of our common
stock, on or before the maturity date.




The
Spring 2009 Notes are convertible into shares of our common stock at a
conversion price of $0.55 per share.  Purchasers of the Spring 2009
Notes receive, for no additional consideration, two stock purchase warrants,
each of which entitle the holder to purchase the number of shares of the
Company’s Common Stock into which the principal amount of the Note is initially
convertible. The first warrant (the “Spring 2009 One-Year Warrant”) is
exercisable at a price of $0.75 per share and expires on June 1, 2010. The
second warrant (the “Spring 2009 Three-Year Warrant”) is exercisable at a price
of $1.00 per share and expires on June 1, 2012. (See Note 8.)




From the
inception of the Spring 2009 Offering in April 2009, through September 30, 2009
we received gross and net proceeds of $231,360 from nine investors and issued
Spring 2009 Notes, the principal amount of which allow for conversion into an
aggregate 420,657 shares of our common stock.




For the
three-month period ended September 30, 2009, we issued common stock as follows:
(i) 60,670 shares of our common stock for accrued and unpaid interest related to
our 2007 Notes, (ii) 53,525 shares of our common stock in payment of rent
pursuant to our Sublease Agreement, and (iv) 82,826 shares of our common stock
pursuant to consulting agreements.




All of
these offerings and sales were made in reliance on the exemption from
registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public offering of
securities.


Item
      4.
              Submission
      of Matters to a Vote of Security
Holders
  Stockholders
beneficially owning 26,186,805 shares, or approximately 61.8%, of our
outstanding common stock as of May 15, 2009, executed a written consent as of
July 1, 2009, with respect to the election of the following five directors to
serve until our 2009 annual meeting of stockholders or until each such person's
successor is duly elected and qualified:


Name
                    
                    For
                    
                    
                    WithheldDennis
      P. Calvert
                    
                    
                    26,186,805
                    
                    
                    
                    (1
                    )Kenneth
      R. Code
                    
                    
                    26,186,805
                    
                    
                    
                    (1
                    )Gary
      A. Cox
                    
                    
                    26,186,805
                    
                    
                    
                    (1
                    )Dennis
      E. Marshall
                    
                    
                    26,186,805
                    
                    
                    
                    (1
                    )Joseph
      L. Provenzano
                    
                    
                    26,186,805
                    
                    
                    
                    (1
                    )
 
 (1)
Because proxies were not solicited, withheld votes cannot be
calculated.




Item 6.
            Exhibits




The
exhibits listed below are attached hereto and filed herewith:




Exhibit No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer of Quarterly Report Pursuant to Rule
      13(a)-15(e) or Rule 15(d)-15(e).31.2
            
            Certification
      of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
      Section 135032
            
            Certification
      of Chief Executive Officer and Chief Financial Officer of Quarterly Report
      pursuant to Rule 13(a)-15(e) or
  Rule 15(d)-15(e).




24




SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.




BIOLARGO,
      INC.Date:
      November 16, 2009
            
            
            
            By:
            
            /s/
      DENNIS P. CALVERTDennis
      P. CalvertChief
      Executive Officer




25




EXHIBIT INDEX




Exhibit No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer of Quarterly Report Pursuant to Rule
      13(a)-15(e) or Rule 15(d)-15(e).31.2
            
            Certification
      of Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.
      Section 135032
            
            Certification
      of Chief Executive Officer and Chief Financial Officer of Quarterly Report
      pursuant to Rule 13(a)-15(e) or
  Rule 15(d)-15(e).